The Lords of Easy Money
Back when banks issued their own private currency, people had to make a judgment call as to the reliability or solvency of that bank. If they went under, the money went with them.
While Volcker’s move to dramatically raise rates helped subdue the rampant inflation, it devastated the economy. Citizens couldn’t afford loans necessary to get cars or homes, businesses couldn’t afford to finance their operations, and unemployment moved sharply higher, upwards of 10% at certain points.
The Fed’s short-term concerns around employment or political popularity that lead it to print money and lower rates leads to the long-term consequences that force them to continue this process.
The Fed’s interventions taught banks if they take on a lot of risk but spread that risk to enough other banks, they will be protected if and when they implode.
The Glass-Steagall Act was implemented under FDR and inspired by the Great Depression’s unscrupulous banking activity. The act divided banks into two spheres: commercial banks where customers put deposits into banks and investment banks where banks speculated in the markets. The FDIC provisions insuring commercial banks was later added to ensure the security of customer deposits.
Dissenting votes within the FOMC are exceedingly rare despite the complicated and uncertain nature of their decisions. Deference to the chairman is expected and dissent is counter to the committee culture.
Greenspan believed bailouts were inevitable so he chose them over managing asset inflation or raising rates.
The Fed frequently favored their mandate toward employment over price stability and chose to suffer through inflation if it meant unemployment was kept low, but the inflation, when left unchecked, eventually led to asset bubbles and massive corrections that sparked greater unemployment in the end.
Operation twist was a measure by the government to buy long-term treasuries while simultaneously taking short-term treasuries off the market. This was to encourage investors to purchase the longer-term treasuries without flooding the market with money.
Share buybacks can artificially boost earnings per share because they remove shares from the market, but they also increase the debt-to-equity ratio by reducing the amount of equity available, which makes the company more levered.
As the government continues to issue treasuries to finance its deficit spending and other nations reduce the amount of treasuries they purchase, the U.S. could be struck with buyer strikes and be forced to entice buyers with higher interest rates (if they can support it).